See, Uber — This Is What Happens When You Cannibalize Yourself

Uber drivers are pissed off. But that shouldn’t come as much of a surprise… At least not to anyone who’s been paying attention.

A group of UberBLACK drivers congregated outside of the company’s SOMA headquarters in San Francisco this evening, protesting the company’s business practices. Among other things, the group had complaints over the lack of health insurance or stock options for drivers. And the group also was protesting lower pay and a number of partners who had been recently been fired.

That last part rings true for Uber CEO Travis Kalanick, who wasn’t on the ground during the protest — instead, he was having dinner in Philadelphia, a market that the company had expanded to last summer. But he said it was his understanding from people reporting to him in SF that the majority of the 20+ protestors were Uber partners who had had their accounts deactivated due to quality issues.

“It’s never easy to have to deactivate a partner,” he said, but stated that it was necessary to do so when drivers received poor ratings for unsafe driving or not having knowledge of the city.

Job security could be an issue at the company, as protestors cited mass layoffs that happened in February. (The company disputes this.) But the bigger issue seems to be that Uber is in the midst of a big transformation, adopting a similiar strategy to Lyft and SideCar, one that threatens to chip away at its legacy UberBLACK and UberSUV businesses.

Everyone’s Private Driver

When Uber first launched about two-and-a-half years ago in San Francisco, it was billed as everyone’s private car service. As Kalanick tells it, the company was founded mainly so that he and a couple of his buddies could ride around town like ballers with their own on-demand black car service.

But they weren’t the only ones looking for a fast, reliable alternative to the woeful taxi service in San Francisco. It turns out that there were many more passengers in San Francisco who were willing to pay a premium for a car that would be comfortable, that they knew would arrive on time, and that they could hail via mobile apps, without having to speak to a dispatcher. Compared to the taxi that never came, paying a little more to hail an Uber seemed like a no-brainer.

Things were good for about two years and then competition came around. Using the same basic idea as Uber — that is, using mobile apps to facilitate communication between drivers and passengers — a bunch of new services cropped up offering their own, cheaper version of on-demand transportation.

But while these services promised the same reliability as Uber’s on-demand service, they came at a much lower cost, due to the fact that they used taxi drivers — or in the case of Lyft and SideCar had built a fleet out of regular drivers operating their own vehicles.

The UBERx Effect

Uber responded by opening its platform to drivers who might not have licenses to operate taxi or limo services. And it also lowered rates for its UberBLACK service by 10 percent. So the company’s move toward cheaper options is not a huge surprise — it first launched UBERx last fall in San Francisco, and soon thereafter announced its intent to make low-cost alternatives to its legacy black car service available in all its major markets.

But adopting the same strategy as Lyft and SideCar, UberBLACK partners who had benefited from its growth over the last few years are annoyed. That’s because they are seeing their share of the pie start to dwindle as the company makes way for cheaper alternatives.

For its part, Uber’s recent fare reduction and its embrace of drivers from the ride-sharing community are likely necessary as it sees increased competition from much cheaper alternatives. That means driving customers to its low-cost UBERx service, even if it’s at the expense of UberBLACK and UberSUV.

Kalanick acknowledged that UberBLACK wasn’t at the right price a few months ago, saying it was difficult to find the right market equilibrium. He also admitted that UberBLACK partners were likely feeling a pinch in recent months, as average fares per hour and per week were slightly down. He attributed that somewhat to seasonality in the first quarter, as things slow down after the holidays. But he said fares per hour in San Francisco were still well above any other major Uber city, at a rate of about 30 percent to 50 percent.

And despite competition from other service providers, Uber continues to grow. “Growth in San Francisco this year is very close to growth we saw last year,” Kalanick told me. “We’re waiting for growth to slow down but haven’t seen it yet.”